There is a common saying on Wall Street, “Sell in May and Go Away.” The saying implies that it is a good move to sell stocks at the beginning of May and buy them back the beginning of November. Historically, stocks have underperformed for this six-month period compared to the period from November to April.
With the S&P 500 and Dow Jones Industrial Average Indices up over 9% year-to-date through June 30th, the idea seems worth considering. However, it is important to note that this is not always a good strategy. 2012, 2013 and 2014 all had positive portfolio returns May through November. In fact, investors would have missed out on an average 6% return during each of the periods if not invested during these time periods.
A study conducted by professors from the University of Queensland and University of California, Berkeley, concluded this strategy has the most meaningful impact during the third year of U.S. presidency terms. During other years, the difference in seasonal return is minimal. The professors surmised the reason for the prominence during the third year may be due to higher economic policy uncertainty at this time versus others.
Data remains solid coming into the summer. Employment trends continue to improve—the unemployment rate at the end of May was 4.3%. There are signs that more individuals are joining the labor force from the sidelines. Despite slowing inflation, the Federal Open Market Committee chose to raise the federal funds rate by 25 basis points, from 1.00% to 1.25%. Indications are for one more rate hike prior to year-end.
Oil prices plunged in June with crude prices falling below $45. Cuts to oil supply by OPEC nations are being offset by ongoing production from non-OPEC countries. Despite low oil prices, large energy companies are showing signs of improving earnings. Energy stocks have underperformed year-to-date. Ongoing earnings improvement should bode well for energy stocks over the long term.
A pullback in stock prices could be healthy for equity markets, as the prolonged bull market at some point becomes a rubber band pulled so far it is ready to snap. There are many reasons, however, to hold onto stocks during the summer of 2017— economic conditions remain sold, earnings growth trends are positive and short-term market timing is always tricky. Having some cash on hand for buying if the opportunity presents itself may be a prudent strategy as the rubber band continues to stretch.